At last major tax reform is firmly on the agenda. It is on the agenda not through the courageousness of politicians but because the High Court decision a week ago to invalidate a major part of states’ taxation provided a catalyst.
There are two glaring follies in the present system of taxation in Australia. The first is that taxation is levied too heavily on productive elements in the economy and not enough on consumptive elements. The second is that the level of taxation raised by each level of the three tiers of government does not correspond to the level of expenditure, thus creating an accountability gap. The federal government carries the opprobrium of levying high levels of tax, notably income tax, while the states and local governments which spend the money do not have to carry the odium of levying the taxes to support the expenditure. They can just blame the federal level for not giving them enough money to spend.
There is a significant national interest in squarely addressing these two follies. The interest is to improve efficiency and equity. The efficiency argument is threefold. First, broad-based consumption taxes can be collected far more cheaply than existing taxes. Secondly, moving tax from income and production to consumption will result in greater incentives to produce and export and greater disincentives to spend and import. Thirdly, narrow state taxes are economically distorting. High stamp duties, for example, are a disincentive for people moving to more efficient and appropriate housing.
An important part of moving to taxing consumption rather than income, is that it acts as a disincentive to consumption and an incentive to saving and investment. It also taxes imports and taxes international visitors more and taxes exports less.
The equity argument is also important. High reliance by states on gambling taxes makes states promote rather than discourage gambling. The present tax structure puts a huge burden on PAYE tax-payers and provides huge opportunities for avoidance others, notably business taxpayers who can lower their taxable incomes through companies, trusts, income splitting and negative gearing.
Last week’s High Court case provides a great opportunity for Australia to get a better tax system. The opportunity should be seized. But it must be seized in a macro sense whereby the advantages of greater efficiencies are shared by all. It should not be seen as an opportunity for narrow sections to improve their position at the expense of others.
The Government must honestly and fairly meet the concerns of low-income people that they will not be adversely affected by change.
The central issues here is that any change away from income and production taxes towards consumption taxes will inevitably affect low-income people adversely unless it is accompanied by some compensatory measures. Most low-income people will not be helped by lower income tax, for example, but they will be profoundly affected by any broad-based consumption tax. A broad-based consumption tax, to be administratively efficient, will affect food, which is now not taxed. It will also affect services which are now not taxed.
These people must be properly compensated with increases in social security payments to cover their loss.
The extent to which government does this honestly and fairly will be a major test for John Howard’s leadership. The leadership test is whether Mr Howard can rally across-the-board support for tax reforms which will be to the benefit of the whole community. The welfare sector has to recognise that overall we will be better off with a shift in the incidence of tax away from production to consumption. Further, the total tax take is likely to increase with the shift because a lot of tax avoidance will be prevented. But business has to recognise that if an efficient no-exemptions consumption tax is imposed it will cause a heavy burden on people who are out of the workforce, either on welfare or living from superannuation. This must mean significant increases in social welfare and other income-support mechanisms to those people. If this is not done in an open and generous way, the tax debate will degenerate into an unseemly bickering session of sectional squawking like fledglings in a nest each desperate to get more than its fair share. The result, of course, will be no reform and a continuation of the existing tax scheme to the detriment of all.
If Australia is to pick up the benefits of tax reform, it will require considerable goodwill on the part of business and those who represent people out of the workforce and considerable leadership by Mr Howard and his government to spark and garner that goodwill.
Past experience shows that far from goodwill and leadership playing the key roles in the tax debate in Australia, selfishness, political point-scoring, grandstanding, exaggeration and scare-mongering have fashioned events. The result has been that the nation as a whole has been worse off.
Taxation should provide revenue for governments to do things which individuals and corporations cannot do, or cannot do efficiently and effectively or in enough quantity: defence, roads, health, education and so on. It should also, within reason, redistribute income to provide equality of opportunity. In doing so, though, it should not create economic distortions, disincentives and inequalities in contributive effort as is happening in Australia at present.
Tax reform will not be a panacea for Australia’s economic and social problems. Other policies likes industry, education, health and so on are just as important, if not more so. But it would be foolish to miss this opportunity.